David Rush, Director at Alderbooke, an Executive Search and Culture Diagnostics firm
In the wake of the financial crisis, a number of regulations have been introduced to ensure that the damage caused by decades of unmonitored and unquestioned activity will not be repeated. However, apart from the most influential and senior leaders in the banking sector, individual employees have not been directly targeted by these changes – until now.
New European rules have imposed a cap on the amount that any individual can receive in a single bonus. These rules were designed to reduce the motivation to generate lucrative returns through high risk deals, which can have catastrophic long term effects. Even so, many of these bonuses are still very generous, since the cap only limits bonuses to the equivalent of a year’s salary, or double that if shareholders agree.
However, unlike other sectors, those in the banking industry will in the future have to wait 7 to 10 years for these bonuses to be paid, and by that time many have moved on to new employers. During this period, it may be discovered that profitable deals were achieved as a result of – yet the guilty employee could still receive a substantial reward.
New rules proposed by the Bank of England aim to address this issue, as they would allow banks to recover the bonus of former employees guilty of misconduct, even after they have moved to another firm. Clearly, this is a well-intentioned idea – but will rules be enough to change employees’ behaviour in this area?
Looking beyond the rules
While the benefits of these new rules are clear, they will also pose some challenges. First, in order to ensure a fair investigation, any firm that pursues this type of action against a previous employee will need to fully co-operate with all aspects of the investigation – even if this means potentially helping the employee’s defence.
Second, firms investigating a claim against a former employee will almost certainly need to disclose confidential and highly sensitive information to the individual’s new employer, who may be a direct competitor. The process will also require a considerable amount of administration, investigation work and legal fees, the cost of which could rapidly amount to the value of the bonus itself.
Not only that, but this activity may also put UK domiciled and regulated banks at a commercial disadvantage in their overseas operations, as these terms will not apply to their non UK banking competitors. This may lead to banks seeking advice on how to avoid the regulation, leading to even more regulation.
Culture at the core
Clearly, a more effective approach would be to address the essence of banking culture and employee behaviour at its core. A lot of attention has already been given to improving the banking culture, but this has mainly been driven by purely defensive motives. Rather than focussing on avoiding fines and penalties, enlightened firms are reversing this trend by actively looking at ways of encouraging more positive behaviours within their organisation.
This idea is already gaining ground. In recent years, corporate culture has become a major agenda item in boardrooms across all industry sectors, as more firms realise that a corporate culture that encourages greater transparency will ultimately improve business performance, reduce illicit behaviour and win client trust. For this reason, many firms are now taking practical steps to create a culture that demonstrates strong ethics and business morals at all levels of the business.
Of course, the first step towards achieving this goal is to understand what the organisation’s culture looks like right now. By replacing employee surveys with comprehensive cultural measuring tools, firms can clearly identify any cultural issues that need to be addressed. Prevention is always better than cure in this regard. By taking steps to understand and act on a firm’s culture, employers will not only discourage unwanted behaviour before it occurs, but will also build a more competitive business in the global market.